It's not just Gib delivery workers benefiting from greater relative bargaining power, but it may not last

As I noted back in September, a low unemployment rate benefits workers (in that case it was Gib delivery workers). Not just because they are more likely to be employed, but also because it raises their relative bargaining power in negotiations with employers, increasing the likelihood of higher wages and better working conditions. It's not just Gib delivery workers though, as the New Zealand Herald reported last week:

After an unsettling two and a half years, people’s working habits are changing fast. Experts are calling it an “employees’ market”, with job seekers not afraid to lay out their expectations from employers.

Seek NZ country manager Rob Clark said the script had been flipped on its head.

“It’s really competitive out there. Companies and organisations are having to think quite differently about how to attract talent.

“Pre-pandemic it was probably a case of ‘it’s a privilege for you as a job seeker to come and work for me as an organisation’, and that’s now flipped on its head. Organisations are really having to work a lot harder to attract that talent because it’s just more competitive.”

Clark said it comes down to simple supply and demand.

“The employment landscape is still very much a candidate-short one, and by that we mean the number of jobs has increased significantly and at a much faster rate than we’ve seen the number of candidates available.

“The outcome of that is we’re seeing fewer applications per job. It’s a market where there’s a very high demand for candidates and there’s just a relatively short supply of them compared to what we’ve been used to.”

It doesn't really come down to supply and demand. It's better explained by a search model of the labour market. As I explained in my post in September:

 In a search model of the labour market, each match between a worker and an employer creates a surplus, which is then shared between the worker and the employer. The share of the surplus (and hence, the wage for the job) will depend on the relative bargaining power of the worker and the employer. If the worker has relatively more bargaining power, then they will receive a higher share of the surplus, in the form of a higher wage...

What has changed is two things. First, the unemployment rate is low. Low unemployment increases the relative bargaining power of workers, because if a worker leaves their job (or refuses an employment offer), the employer then has to start the process of searching for a new worker all over again. The employer would face the search costs of the time, money, and effort spent searching for a worker and evaluating potential matches.

Workers can use their relatively high bargaining power in a number of ways. They can bargain for higher wages, or better working conditions. The Herald article talks about workers demanding greater flexibility, a continuation of the conditions that many (but not all) of us experienced through the Covid lockdowns.

However, workers had better bank those higher wages and better working conditions fast. The Reserve Bank is raising interest rates, and as I explained in The Conversation earlier this week, that will lead to higher unemployment. And as the unemployment rate increases, workers' relative bargaining power falls, and employers' relative bargaining power rises. Once that happens, it will be interesting to see how many employers are willing to entertain their workers' demands for greater flexibility.

Read more:

• Gib delivery workers may be due for a payday

Twitter's blue tick is losing its value as a signal

One of Elon Musk's first actions as the new owner of Twitter was to announce a change to Twitter's 'verified status'. Previously restricted to verified real people (and usually to those with some celebrity status), users would now be able to get their own blue tick for just US$8 per month (or equivalent in other countries). That change comes with immediate problems, as outlined in this article in The Conversation by Timothy Graham (Queensland University of Technology):

...Musk’s US$8 blue tick proposal is not only misguided but, ironically, likely to produce even more inauthenticity and harm on the platform.

A fatal flaw stems from the fact that “payment verification” is not, in fact, verification...

Although Twitter’s verification system is by no means perfect and is far from transparent, it did at least aspire to the kinds of verification practices journalists and researchers use to distinguish fact from fiction, and authenticity from fraud. It takes time and effort. You can’t just buy it.

Despite its flaws, the verification process largely succeeded in rooting out a sizable chunk of illegitimate activity on the platform, and highlighted notable accounts in the public interest. In contrast, Musk’s payment verification only verifies that a person has US$8.

Payment verification can’t guarantee the system won’t be exploited for social harm. For example, we already saw that conspiracy theory influencers such as “QAnon John” are at risk of becoming legitimised through the purchase of a blue tick.

Allow me to put an economics lens on the problems here. It relates to asymmetric information, adverse selection, and signalling.

First, there is asymmetric information on Twitter. Each Twitter user knows whether they are an authentic user and not a bot, a troll, or a scammer. However, each Twitter user doesn't know which other users are bots, trolls, or scammers. That leads to a problem of adverse selection. Each Twitter user, knowing that there are lots of bots, trolls, and scammers, doesn't know for sure if any other account is authentic or not. Whether any Twitter user is a bot, troll, or scammer, or not, is private information (known only to the user themselves, and not to others - that's why it is called asymmetric information). To avoid being trolled or scammed, a Twitter user's best (risk averse) option is to assume that every other account is a bot, a troll, or a scammer. This is what we refer to as a pooling equilibrium (because all other users are pooled together in the Twitter user's mind, as if they are all the same, and low quality). Since Twitter users don't want to engage with bots, trolls, or scammers, if they are assuming that every other account is like that, there is little point being on Twitter. Authentic Twitter users start to drop off the platform, and eventually the only 'users' left are bots, trolls, and scammers. This is what we call an adverse selection problem - each Twitter user wants to engage with other authentic users, but all they find are bots, trolls, and scammers.

Of course, Twitter hasn't collapsed as a platform, so it must have found a way to deal with this adverse selection problem. One way is through the blue tick (verified user) status, granted only to authentic users. The blue tick is a signal to other users that the user with the tick is authentic. In order for a signal to be effective though, it needs to meet two conditions. First, a signal must be costly. The blue tick was previously difficult to obtain, as users had to go through an authentication process (including verifying their identity). So, while there was no monetary cost, there was a cost in terms of time and effort. Second, a signal must be costly in such a way that those with low-quality attributes would not attempt it. Since the authentication process required identity verification, this was a process that bots, trolls, and scammers would be unlikely to attempt. So, Twitter's blue tick seems to meet the conditions of being an effective signal that users are authentic (despite some counter-examples). So, Twitter users could be fairly sure that they were interacting with authentic users, if those users had the blue tick. This is a separating equilibrium (because Twitter users are able to separate the authentic accounts that they want to interact with, from the bots, trolls, and scammers, that they don't want to interact with).

That is all about to change. As Graham's article in The Conversation noted, under the new regime all that it will take for a user to obtain Twitter's blue tick is the payment of US$8 per month. While that meets the first condition of an effective signal (costly), it fails on the second condition, because almost any bot, troll, or scammer with US$8 per month would be willing to pay for the tick. The blue tick will cease to be a signal of an authentic account.

Is that the end of Twitter though? Signalling is only one way to overcome the adverse selection problem. The alternative is screening - where the Twitter user themselves tries to reveal whether another account is authentic or not. That requires a bit of detective work on the part of each Twitter user, and is going to be far from perfect. Perhaps each Twitter user is best only interacting with people that they know personally, or people they have heard of and can be fairly sure are not fake accounts. Avoiding interacting with new accounts, that have few followers, and tweet mostly junk, has always been a good strategy, but will become even more important once the blue tick loses its value as a signal.

Twitter probably won't die as a result of the changes to the blue tick. But it's certainly not going to be as user friendly as before.

Rotorua emergency housing, advertising and incentives

What happens when the government creates a system that generously rewards accommodation providers for providing emergency accommodation? You get this, as reported by the New Zealand Herald yesterday:

Some motel owners providing emergency housing in Rotorua have directly targeted potential out-of-town clients through social media.

A document shared by RotoruaNZ with Rotorua Lakes Council - aimed at informing “messaging” to the Government in March this year - shows examples of emergency housing motel advertisements on Facebook directly targeted at people in Tauranga and Whakatāne.

The advertising in Tauranga and Whakatāne was live at the time the document was produced.

Titles for some ads included “emergency Winz motel”, and “motel room for emergency accommodation” and listed their price as free.

Firms respond to incentives. For an accommodation provider, most of the operation costs are fixed, aside from cleaning. So, maximising profits is broadly consistent with maximising occupancy. That is true regardless of whether the accommodation provider is providing short-term tourist accommodation or long-term emergency housing. So, if a provider has converted their motel to emergency housing, they will want to ensure that they have as many emergency housing tenants as possible. After all, they've probably rendered their motel less appealing to the short-term tourist market, so their best option is to maximise from the emergency housing market. If there aren't enough emergency housing tenants in the local market, then they will try to get them in from elsewhere. And to do that, they need those potential tenants to know that the provider has housing available. At that point, advertising to those potential tenants is a no-brainer.

It's probably not a good thing for the emergency housing tenants though. They're already in a precarious situation, but moving to a new city where they may lack social connections and networks will make a dire situation even worse. So, it is reasonable for government to be thinking about how to reduce this problem. But, not this way:

On Wednesday last week, [Bay of Plenty regional commissioner Mike] Bryant told Local Democracy Reporting that as recently as November 2 MSD had contacted a Rotorua motel about a Facebook post advertising emergency housing to out-of-towners and “asked that they remind their staff not to do it”.

“When we know a Rotorua motel is advertising emergency housing in out-of-town social media groups, we reach out and ask them to stop.”

That may be the weakest response ever: "Please sir, stop advertising to get more tenants for your emergency housing motel". If the government wants a provider to stop advertising for emergency housing tenants, then the government should cancel the provider's emergency housing funding if they don't. Problem solved. Firms respond to incentives. If the incentives create negative consequences the government doesn't like, they need to change the incentives.

Rent control and vacant properties in India

Across the street from my home is a vacant house. It's been vacant since at least mid-2019. In the middle of a housing crisis, the house remains vacant. Various people in the neighbourhood have wondered why the owner doesn't rent the property out. It made one of our neighbours incredibly angry. They wanted to buy a house (in 2019), but they couldn't find that was affordable. And yet, the house next to their rented home was vacant.

Why is the house vacant? Why won't the owner rent just it out? If you look at it, you realise that there are a lot of impediments to becoming a landlord. On 1 July 2019 (around about the time that the house was vacated by its owner), the government introduced new 'healthy homes' standards, that all rental properties would eventually need to meet. The house would need to be insulated, and meet heating and ventilation standards, along with some other conditions. If that would require expensive upgrading of the house (and that seems entirely plausible), then the landlord might have decided it would not be worth the hassle, and has since kept the property vacant. [*]

The healthy homes standards are not the worst policy the government could have enacted that would have led to vacant houses. Thankfully they have never followed through on early indications that they were considering rent controls. It is well known (to economists, at least) that rent controls lead to a worsening of the quality of rental housing (to the extent that rent controlled housing is literally killing people in Mumbai). But rent controls also increase the number of vacant houses.

A good examination of why vacancy rates are higher when rent controls are in place was provided by this recent article, by Sahil Gandhi (University of Manchester), Richard Green (University of Southern California), and Shaonlee Patranabis (London School of Economics), published in the Journal of Urban Economics (open access). Gandhi hypothesise that rent controls and lack of state capacity for legal enforcement of contracts both reduce the security of property rights, and that leads landlords to leave their properties vacant:

Two phenomena could create uncertainty in this allocation of rights of ownership between the landlord and the tenant. First, rent control, whose aim is to protect tenants from rent increases and evictions, alters the allocation of ownership in favor of the tenant. Second, if courts take long to resolve disputes, the ownership of the property could de-facto belong to the tenant for this duration and thus increase the risks for the landlord... The presence of either of these two conditions reduces ex-ante incentives for the landlord to engage in a rental contract. High vacancy rates are a natural consequence of reducing the benefits and raising the costs to a landlord of renting.

The problem of vacancies is particularly acute in India, where:

...the vacant stock of 11.1 million units could house almost 50 million people or around 13% of the urban Indian population.

Gandhi et al. use district-level data from the 2001 and 2011 Indian Censuses, essentially comparing the proportion of vacant properties between districts with and without rent controls. They also look at the relationship between vacant properties and state capacity for contract enforcement, measured as the number of judges per 1000 people. They have panel data for 456 districts across 24 states (for rent control) and cross-sectional data for 580 districts across 29 states (for state capacity). In their analyses, they find that:

...a pro-landlord policy move that relaxes rent revisions could potentially reduce housing vacancy by 2.8 to 3.1 percentage points and lead to a net welfare gain...

...a one to two standard deviation increase in judges per 1000 persons (urban) could reduce vacancy by 0.43 to 0.86 percentage points...

In other words, both rent controls and a lack of state capacity for contract enforcement lead landlords to leave properties vacant rather than renting them out. Gandhi et al. conclude that:

...rent control reform and judicial capacity are two areas in need of urgent attention from policymakers. The Model Tenancy Act, approved in June 2021 by the Government of India, aims to address both issues. It allows for setting rents at market rates and requires separate fast track courts to resolve disputes between tenants and landlords. If states adopt this Act then our findings suggest that vacant housing will decline.

Note that introducing rent control, and making it more difficult for landlords to evict bad tenants, would tend to shift things in the opposite direction. Both are policies that the current New Zealand government has actively considered. The consequences are clear.

[HT: Eric Crampton at Offsetting Behaviour]

*****

[*] In the last two years, things have gotten even worse for the house. A pipe burst in 2020 and flooded underneath the house. The owner didn't do anything. A large silk tree in the front yard rotted, then finally collapsed. Still no sign of the owner. The house is virtually abandoned at this point. I suspect it is not only un-rentable (given the healthy homes standards), but is probably unsaleable as well.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth